DEAR BENNY: I rent an apartment in California’s Silicon Valley, where my job is. I can’t afford a home here because prices average around $600,000. I believe I can afford to buy a house elsewhere while living here and paying rent. Is this a good idea, and can I still avoid PMI with a 20 percent down payment? –Todd
DEAR TODD: I do not think that’s a good idea. I believe that consumers should first buy a home for their own personal use, and then consider becoming a landlord.
There are several reasons for my position. First, not everyone wants to be a landlord. There are good tenants and not-so-nice ones. If you haven’t seen the movie “Pacific Heights,” I recommend it to you. While the movie clearly involves an extreme situation, it highlights many of the problems that landlords often have to put up with.
Second, an investment loan is not the same as getting a mortgage for your principal residence. Typically, loans for investment property carry a higher interest rate, and the lender will require a larger down payment. I am not sure that you will be able to buy that rental property with only 20 percent down.
Third, there is no guarantee that the rental property will increase in value. You may not be able to buy your own home for many years.
And finally, you have to anticipate that there will be periodic vacancies, which means that you will not be receiving rental income, while at the same time having to pay the monthly mortgage, taxes and insurance.
No, I don’t think this is a good idea. Perhaps you should lower your sights and find a house that you can afford to live in.
DEAR BENNY: My son’s home is in foreclosure. He has previously gone through bankruptcy. Can he move his family out of the home now, before the foreclosure is final, without causing additional problems? –Richard
DEAR RICHARD: When the property is foreclosed, the new owner (which could also be the bank) may want them out of the house. But it is also possible that the new owner would be willing to allow your son and his family to rent the property. I would first have your son talk with the bank, and even attend the foreclosure sale. Perhaps the new owner will be willing to work something out so that they can stay in the house.
Certainly, they can move out now, if the house will be foreclosed upon soon. Your son has enough problems, and moving out should not be another problem. But recently, President Bush worked out a deal with several major mortgage lenders whereby many homeowners would be able to avoid foreclosure.
So before they make the move, they should inquire as to what assistance is available — both at the federal level as well as from the state in which the property is located.
DEAR BENNY: A relative recently passed away without a will. She had just bought a co-op in New York and has a hefty mortgage on it. We would like to keep the property, take over the mortgage and have the title transferred. How does one go about doing this? –Dianne
DEAR DIANNE: I cannot give you legal advice on New York law, but I suspect that a probate estate will have to be opened up in the location where your relative resided. If a person dies without a will, you have to look to what is known as the “intestacy laws” of the state of New York. That will spell out who will inherit the property.
However, the lender will want to be paid, and the probate court will most likely require that the cooperative apartment be sold in order to satisfy that lender. The heirs should discuss the situation with the lender who may be willing to allow them to assume the existing mortgage — or at least get a new mortgage so that the co-op can be kept in the family.
You should immediately retain a lawyer in the area who understands real estate and probate law.
DEAR BENNY: I am in the process of buying a home for my child to live in while attending college. This will be a first-time home purchase for me, but I will not be relocating. Am I able to purchase the property as a primary residence or would I need to have the loan processed as a secondary or investment property? –Lena
DEAR LENA: First, I commend you on your decision. It makes good sense to buy the property instead of paying room and board to the university.
Ordinarily, a mortgage lender would treat this as an investment, which would command a higher rate of interest than for a principal residence. However, there is a concept called “shared equity.” You and your child take title together as tenants in common. You can decide what percentage of ownership each of you would have, but since you probably need the tax deductions more than your child, you probably should take the greater percent — say 90 or 95 percent.
A written agreement must be entered into between the two of you, and your lawyer should be able to draft that document.
Many lenders will give you the principal residence rate of interest if you have created this shared-equity arrangement.
DEAR BENNY: Four years before my mother died, she transferred ownership of a summer vacation house to her eight grown children. The agreement stated that until the time of her death she would continue to pay the property taxes/insurance and that our brother currently living at the house could continue to do so. We are all now looking for a recommendation on how to structure the joint ownership of this property, which would a) allow some of my siblings to opt out of this joint ownership situation, equitably; b) allow the rest of the siblings to cover the annual tax/insurance/maintenance expenses leveraging their equity in the property; and c) to allow our brother to continue to live at the house as long as he wants. Should we be looking into a reverse mortgage or home-equity loan? Should we discuss this with an attorney or financial advisor? –Leslie
DEAR LESLIE: You should consult both a financial advisor as well as an attorney. There are potential tax consequences if one of your siblings wants out of the property. Your advisors would have to determine the tax basis of the property since it was transferred to all of you while your mother was alive.
Once the tax issues are understood, your attorney can prepare a partnership agreement, incorporating all of your concerns.
You will not be able to obtain a reverse mortgage; that is generally available only for people at least 62 years old.
DEAR BENNY: I recently received a telephone call from a person who works for the company that holds the mortgage on our home. The mortgage will be paid off in the next few years and the current balance is $20,000. She said we should take out a letter of credit, secured by our home. This would not cost us anything, she said, until we drew down on the letter of credit.
What this would do for us, she said, is forestall our home being foreclosed upon in case for some reason we were sued and the plaintiff wanted to go after our home. She also said that the holder of a second mortgage could not foreclose on a home, so long as there was a first mortgage that existed upon it.
Is any of this true? Should we seriously consider such a letter of credit? –Joe
DEAR JOE: I strongly believe that every homeowner should have a home equity line of credit (HELOC) in case emergencies arise. You pay interest only when you start using the line. To me, it’s a checkbook in my desk drawer for that rainy-day emergency.
However, I am always leery when I hear about these “cold calls.” Your lender is looking for business.
While in my opinion there are good reasons for having a HELOC, the reasons the salesperson gave you are not exactly correct. When you get a home-equity loan, it is in effect a second mortgage (also called a deed of trust), which is recorded among the land records where your property is located. Although I do not know the laws in every state, my experience tells me that the second-trust lender has every right to institute foreclosure. Whoever buys at the foreclosure sale would have to pay off the first mortgage, but that does not preclude the second-mortgage holder from foreclosing.
If you are interested in a HELOC, suggest you do some comparison shopping. What is the initial interest rate? How long will it stay constant until it increases? Is it a variable rate or a fixed rate? Are there any closing costs?
Armed with this information, you should be able to make an intelligent decision as to which lender to use.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.